Will Saudi Arabia's spending largesse pay off?

Saudi Arabia is seeking to borrow a total of $37 billion in 2025 alone, in large part to fund Vision 2030, the country’s sprawling plan to overhaul the economy and society.

While Riyadh’s fiscal deficit is expected to reach $27 billion in 2025, this is relatively modest at some 2.4% of GDP.

Strong issuance to start 2025

Saudi Arabia has issued $12 billion in new international bonds to bridge its budget deficit and reduce debt, as investors oversubscribed the order book to the tune of $37 billion.

The kingdom managed to obtain lower pricing on the bonds relative to initial guidance for the $5 billion, $3 billion, and $4 billion sold in tenors of three, six, and 10 years.

Saudi officials note that they plan to tap a variety of instruments, new currencies, and markets in a bid to diversify risk and broaden the creditor base and domestic and international financing options.

For instance, the Saudi sovereign wealth fund, PIF, has gained access a $7 billion Islamic credit facility.

The kingdom has also recently taken a three-year $2.5 billion loan from Abu Dhabi Islamic Bank, Crédit Agricole, and Dubai Islamic Bank.

This strong capital raising and investor enthusiasm reflect Saudi Arabia’s solid fundamentals as it transforms its economy.

In Praise of Folly

Indeed, in September 2024 the IMF issued a broadly laudatory statement at the conclusion of its Article IV consultations, praising the rationalization of Vision 2030 investment spending in line with fiscal constraints and sectoral priorities.

The largest near-term economic risk in Saudi Arabia may be overheating, with IMF directors advocating for a recalibration of investment spending to this effect.

They also recommended strengthening fiscal institutions, additional fiscal adjustments, mobilizing non-oil revenue, phasing out fuel subsidies, targeting social programs, and containing the wage bill.

Reading between the lines, it does seem that the IMF emphasis on reprioritization and fiscal adjustments dovetails with critiques of a slew of white elephant projects across the kingdom. These include plans for:

• Neom - a 170 kilometer-long megacity in the desert

• Kingdom Tower - a one kilometer-high skyscraper in Jeddah

• The Mukaab - a cube-shaped attraction in Riyadh set to be the world’s largest structure

• World Cup 2034 football stadiums

• F1 circuit

While none of these projects should detract from productive investments occurring across the kingdom, their presence signals a worrying tendency of government folly for prestige.